A BIT (sorry) More on ISDs

A nice discussion of my article with SBD at The National Interest has taken place in comments at the International Economic Law and Policy Blog, mostly centering on the question of investor-state dispute (ISD) clauses in trade deals. A bit wonkish (okay very wonkish), but potentially very important as well.

Mark Kantor, who is affiliated with Georgetown and Columbia Universities, has disagreed with our take on ISDs, which is that a US-EU trade deal could precipitate a general decline in their usage. He raises some very good points; you should read them. He may very well be correct. (Although he's wrong to say that we don't take into account recent US and EU ISD behaviors, including the inclusion of ISDs in the model BITs of the US and EU; in fact we mention that specifically.)

But I'm not quite ready to give up our claim just yet. Via Nathan Jensen, here's a recent report in Columbia FDI Perspectives by Joachim Karl of UNCTAD demonstrating, among other things, the increased costliness to governments (including those of developed economies) of ISDs. One highlight:

Governments face a dilemma. While many governments consider ISDS a key element of international investment protection, ISDS is becoming increasingly risky. For one, governments’ risk of being sued by foreign investors is growing. Second, when a dispute arises, the defence requires enormous resources; if a case is lost, damages can be very high. Third, governments live with an unpredictable arbitration practice without having the legal safety net of an appellate body like in the WTO. Fourth, complex domestic legal issues reaching beyond international investment law are examined by international arbitrators. Fifth, as more disputes are directed against countries with highly developed domestic judicial systems, governments need to ask themselves how positive discrimination of foreign investors in respect of ISDS can be justified.

Karl notes that many countries are in something of a holding patterns regarding ISDs: not ready to do away with them, but not exactly expressing enthusiasm for them either. He also notes that the US is one of the leaders in restrictions to and regulations of ISDs. As such, if the US decides to de-emphasize ISDs it could provide momentum for a more general movement in that direction. the Here's part of the crux:

Overall, the existing ISDS system is no longer recognized as an indispensable core part of IIAs. Discontent is not limited to a few developing countries, but has spread to G-20 countries, including some of the BRICs. Further momentum could jeopardize the ISDS system as a whole.

We suggest that, for political reasons, a US-EU FTA/BIT could be part of that momentum if it excludes an ISD, and there are good reasons to believe that it might. In fact, that is our argument.

We could be wrong, but it's nice to know that we're not the only ones thinking along these lines.

What Might a US-EU FTA Mean for International Investment Treaties?

In a previous post, Will discussed how a potential US-EU free trade agreement might effect widespread trade liberalization through inclusive institutions such as the UN. Indeed, many commentators are wary of the possible deal, believing it to signal the end of inclusive negotiations that characterize the WTO (though Will provides a nice counter to such alarmist claims).

A ratified US-EU FTA also has the capacity to change international investment law quite fundamentally. At stake is whether an agreement would have an investor-state dispute clause (ISD). Unlike traditional dispute settlement mechanisms, ISDs allow firms to sue states directly, usually within the context of an international arbital board such as the International Centre for the Settlement of Investment Disputes (ICSID). ISDs are controversial primarily because there is a widespread fear that MNC with deep pockets will engage in litigation wars of attrition. Furthermore, when investors can sue states directly, governments no longer have access to diplomatic tools to smooth over disputes. And, to the extent that the long term viability of open goods and capital markets requires some flexibility to deal with domestic push-back, the removal of states as arbiters of which investment disputes are worth pursuing and which are better left ignored could have lasting negative implications for the political viability of economic openness.

Unlike some other aspects of FTAs, ISDs can actually become salient issues. In South Korea there were a series of protests against the ISD provision of the recently ratified US-South Korea FTA. Other countries, including India, South Africa, and Australia, have recently decided to nullify portions of trade and investment treaties that include ISD provisions. Still, ISDs are widespread. The model US Bilateral Investment Treaty includes an ISD provision and ISD clauses are standard in US FTAs. However, the types of treaties that contain ISD clauses tend to be signed between states characterized by economic asymmetries.* BITs are a prime example - while over 2000 such treaties exist, there are no BITs between two advanced industrial economies.

So, the question then is whether a US-EU FTA agreement will include an ISD clause. Generally, advanced industrial countries have shown they are more interested in promoting legal regimes that protect "their" MNEs while less willing to cede jurisdiction over investment disputes in which they might be a defendant. For instance, Australia has decided to drop ISD clauses from its BIT and FTA regime after it was sued by Philip Morris; Philip Morris used Australia's BIT with Hong Kong to establish ICSID jurisdiction. Given growing dissatisfaction with the costs of ISD, it will be interesting to see if such clauses would persist if the US and EU decide to not subject themselves to such extra-territorial juridical measures.

My quick, speculative take is that ISDs will be less widely used in the future. As advanced industrial economies begin to receive more FDI from emerging economies with which they have such dispute clauses, they will seek to extract themselves from such agreements. Moreover, a movement away from ISDs may be a good thing. First, ISDs tend to create duplicated layers of juridical authority that generate confusion. Second, as mentioned above, ISDs make it harder for governments to intercede in investor-state disputes in ways that allow for flexibility necessary to maintain broad coalitions of support for deep economic integration. Finally, there is some evidence that states with ISDs tend not to pursue meaningful domestic legal reforms, and thus ISDs can contribute to the persistence of partial economic reforms that ultimately impede broad-based growth.** Removing ISDs may help overcome some of these problems.

*An important semi-exception is that NAFTA includes ISD provisions. However, this clause remains quite controversial in Canada. Canada has not yet ratified the ICSID convention, reiterating the extent to which countries are quite resistant to ceding final arbital authority to an international tribunal. Additionally, the US-Australia FTA suggests, but does not require, dispute settlements between investors and states.
** A place to start reading about this: Ginsburg, Tom (2005) "International Substitutes for Domestic Institutions: Bilateral Investment Treaties and Governance" International Review of Law and Economics 25:107-123.

New Multilateral Trade Agreements?

Earlier today, USTR Ron Kirk suggested that multiparty regional trade agreements might be an emphasis of the Obama Administration’s second term.  Kirk emphasized that the President “has more of a bias toward multilateralism than anything else.”  Some have reacted to this announcement as suggesting a shift in policy – from a bilateral to a more multilateral approach toward trade agreements.  I’m not so sure.

Yes, in Obama’s first term significant bilateral treaties were signed with South Korea, Colombia and Panama.  But, the negotiation of these agreements began in earnest 5 years earlier under the Bush Administration.  That they were implemented in 2011, after some additional trade-related policy concessions were made to the President and Congressional Democrats, does not necessarily indicate that these agreements reflected the Administration’s ideal approach to trade policy.

Kirk’s announcement might also be significant in that it signals an emphasis on trade policymaking more generally.  Many criticized the Administration for a lack of attention to trade policy in the early years of Obama’s first term.*/**  Whether the critiques are justified is an open question.  On the one hand, there was the high-profile application of new tariffs to select tire products; there was also a domestic content component to the stimulus bill, etc.  But, let’s say trade policy was generally on the back-burner early on.  After all, Ron Kirk himself essentially admitted as much.***  Would this really be that surprising?  In the wake of the financial crisis and severe recession, would we expect the Administration to be especially aggressive in pursuing trade agreements of any sort?  In addition to the obvious preoccupation with stimulus legislation, there is also a long line of political economy literature finding that constituency preferences for trade liberalization are reduced in economic downturns (this applies to both interest group and individual-level preferences). 

With respect to individual-level preferences, I recently came across a Pew Research Center survey which found that public support for free trade waned at the onset of the global crisis.  In the seven years leading up to the financial crisis, about 44 percent of U.S. respondents were of the belief that free trade agreements like NAFTA and the policies of the World Trade Organization were good for the U.S. economy.  In April 2008, opposition to free trade grew, and only 35 percent of respondents answered that free trade agreements had a favorable impact on the economy.  While the figure subsequently rebounded to previous levels, the recession appears to have had a negative (albeit temporary) impact on views regarding free trade. 

If the USTR’s recent announcement does indicate that there will be a renewed focus on trade policymaking, maybe this shouldn’t surprise us at all.

 

*Reuters.  2011. “Fifty economists have written to ask U.S. President Barack Obama to ‘step up to the plate’ on World Trade and champion a last gasp deal on the moribund Doha round of world trade talks.”  Sept. 21, 2011.

**Sistema Económico Latinoamericano y del Caribe (SELA). 2010.  U.S. Trade Policy under the Obama Administration: Implications for SELA Member States.  March 2010.

 

***http://www.dallasnews.com/business/columnists/jim-landers/20121210-former-dallas-mayor-ron-kirk-from-listening-to-action-on-trade-pacts.ece